Houston and COVID-19: Are We Nearing the End-Game? Robert W. - - PowerPoint PPT Presentation

Houston and COVID-19: Are We Nearing the End-Game?

Robert W. Gilmer, Ph.D. C.T. Bauer College of Business October 2020

Overview of Today’s Discussion

• All about COVID-19 as a disease and how pandemics affect the economy
• Employment and income/spending effects of COVID on the U.S. and

Houston economic outlook

• With many mixed messages on the economy, but how bad is this

downturn?

• Houston’s oil and gas sector is working on a streak of six tough years
• Brief thoughts on COVID and the global economy
• The outlook for Houston as the virus is controlled and the economy heals
• A consumer warning: The virus is in charge, and the economy is just along

for the ride. The forward-looking projections offered here serve as thoughtful planning scenarios. No one can offer a meaningful or working economic forecast right now

Perspective on COVID-19, the Pandemic, and Its Economic Impacts

Pandemic Waves of the 1918-20 Spanish Flu And COVID-19 Great Britain

• E. Jordan, Epidemic Influenza: A Survey, Chicago, Ill. American Medical Association, 1927; WHO Coronavirus

Dashboard data to 10/23/2020. Mortality rates are per thousand and at annual rates

Three Waves of the Spanish Flu in 1918-20 (Death/000) In 2020 a Milder Disease with Public Health Interventions (Death/000)

1 2 3 4 5 6

7-Mar 7-Apr 7-May 7-Jun 7-Jul 7-Aug 7-Sep 7-Oct

Death Toll = 44,158 Population of Great Britain = 66.65 million

Death Toll= 228,000 Population of Great Britain = 44.02 million

COVID-19: Spread and Mortality Rate Compared to Other Diseases and Pandemics

COVID-19 Basic Reproduction Rate

R0 Measles 12 to 18 Mumps 10 to 12 Chicken pox 10 to 12 Polio 5 to 7 Whooping Cough 5.5 COVID-19 2.5 to 4.0 Common Cold 2 to 3 Influenza (1918) 1.4 to 2.8 Ebola 1.5 to 2.5 Influenza (2009) .9 to 2.1

COVID-19 Case Mortality Rate

Percent 2016 Ebola 66 2014 Ebola 40 2012 MERS 34 1918 Spanish Flu > 2.5 COVID-19 0.65 1968 Influenza < 0 .5 2009 Swine Flu 0.1 to 0.5 2002 SARS 0.11 1957 Influenza < 0.1

CDC Pandemic Planning Scenarios: COVID-19, May and September 2020; Imke Schroeder, “COVID-19 a Risk Assessment Perspective,” Journal of Chemical Health and Safety (May 11, 2020); Wikipedia, “The Basic Reproduction Rate,” first table and associated references; Associated Press, “WHO Says 10 Percent of World Population Infected,” October 5,2020

How Does COVID Affect Economic Conditions? Some Definitions

• If the disease is left uncontrolled, it can create widespread illness, labor shortages, and

supply chain disruptions as economic activity is disrupted

• Reactive social distancing by the public has been part of every past pandemic as the fear
• f the virus forces us to avoid crowds, stores, bars and restaurants, public transportation,

and travel

• In many cities, mandatory public orders have also been a part of past epidemics: limits to

crowd size, closing of bars and restaurants, closing schools, travel restrictions, etc.

• The widespread use of mandatory stay-home orders and closing all nonessential

businesses is a new feature. They pull economic damage to a point early in the pandemic but are meant to ease later infection rates. Once stay-home orders are lifted, the reactive social distancing and other mandatory public health orders continue if COVID is active

• In Texas, the unspoken public policy is to open the economy as far as possible without

allowing the virus to overcome the hospital system

COVID-19 Lessons from the Economist?

• Reactive and mandatory social distancing – including stay-home orders -- have a

significant effect in slowing the spread of the virus

• Effectiveness in any locality depends on many variables: social cohesion of the population,

availability of high-speed internet, sick leave policies, local work rules and protections, etc.

• Less restrictive policies like testing and masks can substitute for stay-home orders and other

mandatory public health restrictions, and even displace some voluntary social distancing

• Mandatory and voluntary social distancing both have a significant role in job

losses, substantial spending declines, and greatly worsened economic outcomes

• The division between the economic damage done by stay-home orders, other involuntary

social distancing, and voluntary or reactive social distancing is still controversial

• Lifting stay-home orders has provided only partial economic relief, as reactive distancing and

many mandatory restrictions remain in place on travel, public gatherings, business closings, etc.

• Economic impacts are higher for the economically vulnerable with low

educational attainment or low wages

For an overview see IMF, World Economic Outlook, An Overview of the Literature on the Economic Impact of Lockdowns, Box 2.1, October 2020, pp. 77-78

The COVID Shock Limits Mobility: Big Drop with Stay-Home Orders and Partial Recovery

Grocery and Pharmacy Retail and Recreation

Herd Immunity? A Vaccine? What and When Is the End Game?

• If enough of us contract COVID-19 and become immune, the virus cannot spread

and dies out. So-called herd immunity is not likely soon. Admittedly crude calculations based on R0 say 60 to 75 percent public immunity is required. Current immunity is close to 10 percent. (Herd immunity = R0 – 1/R0)

• When is a vaccine likely? It is probably in reach, even if we put the current

political noise aside

• Health and Human Services Secretary Alex Azar said on October 2 that 100 million doses

could be available by year-end, and available to all Americans by April of 2021

• Some scientists and vaccine-makers say if all goes well, it could be available to high-risk

groups this year, and available to all by late summer

• The less optimistic say things rarely go well, and perhaps a vaccine is only widely available

beginning in mid-2021

• We are apart by a matter of a few months. We potentially could see the negative

economic and public health impacts of COVID largely disappear during 2021, particularly the reactive social distancing and most public health restrictions

COVID and the Houston Economy

COVID-19 Shock Plays Out Through All Parts of Houston’s Economy In the Second and Third Quarter

2,400 2,500 2,600 2,700 2,800 2,900 3,000 3,100 3,200 3,300 125.0 130.0 135.0 140.0 145.0 150.0 155.0

U.S. and Houston Payroll Employment (U.S. Millions/Houston 000)

U.S. Houston

500 1,000 1,500 2,000 2,500 $0 $20 $40 $60 $80 $100 $120

Rig Count and Real Oil Price

real WTI price rig count

Nine Local Service Sectors Account for 43% of Houston’s Jobs in 2019, But Made 70% of March/April Job Losses

Nine Key Service Sectors Accounted for 70.0 % of Houston’s April Jobs Losses

1000 1050 1100 1150 1200 1250 1300 1350

Nine-Sector Employment (000)

COVID-19

Sectors Sensitive to Social Distancing Made Up 42.6% of Local Jobs in 2019

• 391,000 Health Care
• 303,600 Retail
• 267,000 Food Service
• 166,000 Finance
• 115,800 Other Services
• 63,400 Private Education
• 37,400 Arts and Entertainment
• 28,700 Accommodation

20,200 Air Transportation

• 1,343,600 All 9 sectors
• 3,156,000 Total Payrolls

Harvey

Houston’s Payroll Job Recoveries Through September Are Only 44.8%

• f March/April Losses, As Nine Service Sectors Make-Up Most Gains
• Soc. Dist. Services Fell in March/April

With 55.3% Recovered By September

• 400.0
• 300.0
• 200.0
• 100.0

0.0 100.0

Thousands

Monthly Losses/Recoveries in Payrolls (000)

Payrolls SD Services

Social-Distance Services: Percent Recovery By Sector Since April

• 166.6%

18.4% 26.6% 74.3% 27.6% 13.9% 66.0% 78.2% 60.4% 55.3% 44.8

• 200.0%
• 150.0%
• 100.0%
• 50.0%

0.0% 50.0% 100.0%

Air Transpt Accomodation Arts/Entertainment Private Educ Other Serv Finance Food Service Retail Health Care Nine SD Sectors All Payrolls

Houston’s Unemployment Rate Spikes and Begins Slow Turnaround

Houston’ Unemployment Rate Peaks at 15.1% in April, Falls to 9.6% in September

2 4 6 8 10 12 14 16

Houston Unemployment Rate, %

Fall In Unemployment Rate Looks Real As the Labor Force Grows

• 178,342

13,158 204,579

• 200,000
• 150,000
• 100,000
• 50,000

50,000 100,000 150,000 200,000 250,000

Net Change February to Sept

Employment Labor Force Number Unemployed

Initial and Continued Claims for Unemployment: A Similar March/April Response in Texas vs. U.S.

50 100 150 200 250 300 350

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Thousands

Millions US Initial Claims TX Initial Claims 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 0.0 5.0 10.0 15.0 20.0 25.0 30.0

Millions

Millions US Continued TX Continued

<- U.S. TX-> <- U.S. TX-> FRED, St Louis Federal Reserve Bank. State unemployment programs

Initial Claims in Texas and Houston Mirror Each Other, Local Continued Claims Lag the State By a Month

10 20 30 40 50 60 70 80 50 100 150 200 250 300

3/7 4/7 5/7 6/7 7/7 8/7 9/7

Thousands Thousands TX Initial Hou Initial

<- TX Hou->

50 100 150 200 250 300 200 400 600 800 1,000 1,200 1,400

3/1 4/1 5/1 6/1 7/1 8/1 9/1

Thousands Thousands

Continuing Claims, Texas v. Houston

Texas Con't Houston Con't

Hou-> <- TX

Initial Claims, Texas v. Houston

Initial claims for Houston are the 9-county metropolitan area; continued claims for Houston are for the 13-county Gulf Coast Workforce Development Board, including the metro area plus four small counties with less than 2% of 13-county claims

Trillions of Dollars Poured Into COVID-19 Programs to Support the Economy in March/April

$747 $560 $500 $340 $254 $44 $26

$0 $100 $200 $300 $400 $500 $600 $700 $800

Small Business Individuals Big Corps State/Local Gov't Public Health Education/Other Safety Net

$2.5 Trillion for March/April Stimulus ($ billion)

• Return of zero rates, QE2, forward

guidance

• Return of 2008 credit facilities:

primary dealers, money market funds, commercial paper, etc.

• Major corporations with investment

grade credit for up to $750 billion lending expansion

• Mid-Size/Main Street loan expansion
• f up to $600 billion in 5-year loans
• Treasury absorbs $75 billion in losses

(if any) from each of the corporate lending programs

Includes $470 in additional stimulus from April supplemental appropriation for the Paycheck Protection Program and Public Health

Federal Reserve Stimulus

Pandemic Stimulus Keeps U.S. Personal Income Growing From February to August

Monthly Change In Personal Income ($ Billion s.a.)

March April May June July August Feb - Aug Personal Income

• 29.4

191.5

• 73.2
• 19.9

7.7

• 45.3

43.3 Employee Compensation -28.4

• 71.6

22.1 19.5 11.6 11.4

• 26.2

Wages and Salaries

• 25.1
• 60.8

19.2 15.5 9.8 10.0

• 23.2

Benefits

• 3.3
• 10.8

3.0 4.0 1.8 1.4

• 2.9

Self-Employed Income

• 10.5
• 16.0

4.0 8.8 1.7 3.6

• 4.8

Gov't Transfers 6.7 275.5

• 93.3
• 44.5
• 4.0
• 60.4

80.6 Economic Impact 0.0 215.7

• 165.2
• 47.1
• 0.6
• 2.0

0.8 Unemployment 3.9 34.9 71.9 4.1

• 7.0
• 57.2

50.5 Disposable Income

• 23.4

204.6

• 76.6
• 22.8

5.2

• 47.6

49.1 Personal Consumption

• 85.3
• 149.8

86.3 69.3 18.8 12.7

• 48.3

Personal savings 61.8 354.4

• 163.0
• 92.2
• 13.6
• 60.3

97.4

The Bureau of Economic Analysis reports monthly data on an annualized basis and here they have been divided by

• twelve. Selected sectors only. February to August reported as total change over five months. October 1, 2020.

Income Support, Cheap Money, and E-Commerce Drive U.S. Retail Sales Past Pre-COVID Levels to Record Highs

• Income support pushed July/August

retail sales past February pre-COVID levels and to all-time highs. The two largest sectors (autos and e- commerce) are the big winners

• September continued the trend to

strong growth retail growth, up 1.9 percent for the month

• Food stores, books and hobbies, and

home improvement fill in for restaurants, gasoline, clothing, etc.

• Trends in stimulus payments and easy

credit also drive the push to high levels of homes sales, including record sales of existing homes in Houston

• 20
• 10

10 20 30

Books, Hobby, Sports Electronics Furniture Clothing Health Bldg Mat Gasoline Gen Merch Grocery Restaurants Nonstore Auto Total

Retail Sales (% change Feb to Sept)

By Size of Sector in Feb, Largest at top/Smallest at bottom

U.S. Census Bureau, October 16, 2020

Houston Metro Area Auto Sales and Pricing Show the COVID Dip and Stimulus Recovery

10 12 14 16 18 20 22 24 26 28

Jan Feb Mar Apr May Jun Jul Aug Sep

Thousands

Retail Auto Sales, seas. adj.

36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 41.5 Jan Feb Mar Apr May Jun Jul Aug Sept

Thousands

Auto Price, $

Houston Existing Home Sales Soar in Stimulus-Driven Pandemic

(Houston MLS sales, s.a.)

5 6 6 7 7 8 8 9 9 10 10

Thousands per month

• Houston existing home sales had

slowed in 2019 as the Fed paused in its push to raise interest rate

• The initial response to the pandemic

was a sharp pull-back in sales due to the stay-home orders and nonessential business closings

• Then a sharp drop in interest rates and

a check from the federal government ignited a sharp increase in sales

• Sales slowed in September with schools
• pening, limited inventory, and a big

jump in prices

Source: Texas A&M Real Estate Center, seasonally adjusted by IRF

Harvey

Houston Existing Home Sales: Pandemic Shrinks Inventory and Raises Prices

2 2.5 3 3.5 4 4.5

Months Supply: 3.6% in Dec 2018 Falls to 2.4% in Sep

215 225 235 245 255 265 275 Thousands

Home Prices Absorb Pandemic Shock, Then Jump 11.3% on Low Interest Rates

Source: Texas A&M Real Estate Center, seasonal adjustment by IRF

New Home Starts and Pricing in Metro Area Houston Soar in 2020

Local Housing Starts 12-Month Change

Number Percent Houston 34,557 17.4% Dallas-Fort Worth 39,047 16.0% Austin 20,395 16.1% San Antonio 15,033 14.4%

• Houston starts were up 34,557 and

closings up 33,812 over 12 months

• 2020Q3 saw 10,719 local starts, the

most since 2007Q2

• It is still an entry-level market, with

84% of sales geared to $399,000 sales price or below. Local buyers are 95% of sales

• Of 10,747 builder plans analyzed,

89.9% saw price increases of $15,000 or 4.7%

MetroStudy

How Bad Is This Downturn? It’s Bad ... But Maybe Not as Bad as Advertised

Purchasing Managers' Index Sees U.S. and Houston Briefly Contract and Quickly Move to Expansion

30 35 40 45 50 55 60 65 70 75

Houston and U.S. PMI

US Index Houston Index 50 Neutral

!

35 40 45 50 55 60 65

Houston and U.S. PMI

US Houston 50 Neutral

Great Recession Fracking Bust U.S. Recession Asian Financial Crisis COVID Hurricane Harvey COVID

A Health Care Crisis Drives Big Swings in Jobs, Despite Moderate Underlying Recession?

• The COVID pandemic leaves us with a strange mix of unprecedented pandemic-driven

job losses and a never-before seen stimulus-driven surge in income and spending

• Could it be a moderate U.S. recession is buried under the huge swings in the

employment data that show a worst-ever one-quarter recession that immediately turns modest expansion?

• The use of widespread stay-home orders and closing of nonessential businesses pulled much

economic damage forward to early months of the pandemic -- in ways not seen before.

• A 2003 pre-COVID paper by the Congressional Budget Office used a historical/bottom-up approach

to pandemic impacts and concluded that a severe pandemic like the Spanish-Flu would cause a moderate U.S. recession. Extraordinary use of stay-home orders was not considered

• A recent paper by Barro, Ursúa, and Weng (2020) found that the Spanish flu probably caused a

moderate U.S. recession. Barro and Ursúa have studied many such “macroeconomic catastrophes” including WWI and the Great Depression

• I assume for planning purposes that recession is certainly underway in the U.S. – but one

that will average to a moderate recession once stimulus and public health officials are

• finished. When the pandemic is over in the first half of 2021, the U.S. will be working

itself out of recession typical of those seen over the last 60 years

A Moderate U.S. Recession Scenario for COVID-19: Payroll Employment w/o Stay-Home Orders or Social Distancing

145 147 149 151 153 155 157 159 161 163 165

U.S. Payroll Employment (million)

Moderate Recession No Recession

• A typical U.S. recession sees payroll

employment fall 3.0 percent over four quarters and then recover in five more

• Recovery means a return to the beginning

level of employment, but the loss of eight to nine quarters of growth sees no return to the pre-trend levels of employment that were forecast before 2026

• We take this to be our overall economic

guide through 2020 and forward, but with a wild ride from quarter to quarter through at least early next year

• The wild ride is driven by an

unpredictable and unforecastable virus and the public health authority's response to the virus

The Moderate U.S. Recession Carries Through to the Local Economy: Houston Payrolls with Oil Price at $55

3,000 3,100 3,200 3,300 3,400 3,500 3,600 3,700

Houston Payroll Employment Number of Jobs

Base US Growth Severe COVID

• 70
• 50
• 30
• 10

10 30 50 70 90 110

Houston Payroll Employment Four Quarter Change in Jobs

Base US Growth Severe COVID

.

Houston’s Economic Base Drives the Economy: Job Losses Are In Secondary Sectors While the Base Points to Moderate Recession

100 200 300 400 500 600

Payroll Employment (000)

Not Oil Oil

220 230 240 250 260 270 280 290

Oil versus Not Oil Base Employment (000)

Not Oil Base Oil Base

Current Losses in Houston’s Economic Base Point to a Typical Houston Downturn Now Underway

Houston's Economic Base in Five Recessions

Downturn in Economic Base Oil’s Part of Base Losses Years Jobs Lost (000) % Fall %

1991-93 30.1 7.3 36.4 1998-99 34.0 7.4 51.8 2001-04 52.2 11.5 34.1 2008-09 68.5 13.1 44.9 2014-16 97.0 16.6 76.3 Average 56.4 11.2 48.7 2019 to Sept 52.0 9.7 56.2

• 1990-93: A U.S. recession, Iraq invades

Kuwait, First Gulf War and oil price collapse

• 1998-99: The Asian Financial Crisis saw the

global economy collapses along with oil prices, while the U.S. stayed strong

• 2001-04: U.S. recession, 9/11 Attack, and the

Second Gulf War

• 2008-09: The Great Recession brought both

economic and oil collapse

• 2015-2016: The Fracking Bust was mix of a

massive speculative collapse in oil, while the U.S. economy stayed very strong

*Base losses have varied from 50 – 60,000 each month from May to July. All are consistent with a moderate recession underway.

Another Downturn in Oil

Oil and Houston: Difficult Times Since 2014

• From 2011-14, Houston enjoyed an oil boom that rivaled the 1980’s, averaging

100,000 or more new payroll jobs each year

• But the fracking bubble burst in November 2014 when OPEC withdrew as swing

producer and let the price of oil collapse. While the local oil sector lost 77,300 jobs, the U.S. economy grew strongly. Meanwhile, growth in Houston’s payroll employment came to a standstill with no growth in 2015 or 2016

• A moderate recovery in oil prices in 2017-18 brought a partial recovery of local oil

employment, but by 2018 an industrywide credit crunch had set in. Oil jobs were in decline again in Houston by mid-2019

• Then comes the COVID-19 pandemic and the Saudi-Russian oil war, resulting in

complete collapse in oil markets in May

• We now see a nascent recovery underway, with little movement in drilling and

the rig count, but with better growth in fracturing and completion of a backlog of uncompleted wells.

Perspective Since 2014: All the Speculative Excesses Wrung Out in 2015-16 as the Fracking Bubble Burst

(Houston Oil Jobs ‘000)

• -The 2015-16 Fracking Bust was a speculative

bubble that burst, and initially looked much like the early 1980’s

• - We saw oil prices fall from $100 to $30 in

2015-16; the rig count fell from 2000 to 400; local upstream job losses were 77,300.

• - Only 22,700 of those Houston lost oil jobs

returned by 2019Q2 or about 30 percent

• - The industry was lean as we enter this

downturn, with few speculative excesses to wring out.

• - The large job losses of 2015-16 are harder to

reproduce in 2020, even given current events

2015

*Texas Workforce Commission estimates. Upstream Jobs = Oil Producers and Services, Machinery, and Fabricated Metal

80 100 120 140 160 180 200 220 240 260

• 15-12 -9 -6 -3 0

3 6 9 12 15 18 21 24 27

Upstream Oil Jobs ‘000 Seas. Adj.

The 1980's Current Downturn

Peak

Wall Street Turns Its Back on Fracking Producers

Fracking Is a New Model for Oil Production

• Looks more like a competitive industry. Many

small operators, price-takers, and assembly- line production

• Low barriers to entry for new producers, i.e.,

capital, some geology, leases, and a hire a service company. Today a hedge fund, tomorrow an oil producer

• Traditional exploration risk is gone,

production costs are understood, and the oil is there

• Get a quick and certain rise or fall in oil

production in response to changing oil price incentives

Fracking’s Problems Now?

• Fracking is a high-cost source of oil, and even

$55 oil hurts many companies, and $2 natural gas is lethal for others

• The industry was born in an era of cheap

money from the central bank, and too many companies used low interest rates and a rising stock market to try for a quick killing – instead

• f building a viable business
• Many producers struggled in 2019 to deliver

steady income and growth to impress the stock market, which has now turned its back

• n the industry
• A wave of bankruptcies, delistings,

forbearance, etc. hit hard in 2019

Lower Oil Prices and Poor Performance Pressures Fracking Profits, Leads to Lower Stock Prices and a Credit Squeeze

1,000 2,000 3,000 4,000 5,000 6,000 2,000 4,000 6,000 8,000 10,000 12,000 14,000

S&P Stock Returns to Oil: Index

Oil Producers Services and Machinery

500 1,000 1,500 2,000 2,500 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

After Equities Peak in 2018

 Producers Services  S&P Dow Jones to October 21, 2020

Moderate Oil Prices and a Squeeze on Credit Generate Bankruptcies in 2018-19

10 20 30 40 50 60 70 80

WTI Oil Price Since 2018 ($/b) Oil-Related Bankruptcies in 2019-20: Number and Secured & Unsecured Debt

Producers Oil Services Number Debt ($B) Number Debt ($B) 2019Q1 5 1.62 3 .01 2019Q2 13 4.67 11 7.77 2019Q3 15 6.70 2 .00 2019Q4 10 12.81 7 .26 2020Q1 5 2.52 7 10.81 2020Q2 18 28.10 11 13.05 2020Q3 18 23.10 26 10.99

DOE/EIA and Haynes and Boone Bankruptcy Monitor

Oil Bankruptcies Mounted Quickly in Late 2019: Pandemic Oil Prices Bring More Pain in 2020

Oil Producers Oil Services Number Debt ($ bil) Number Debt ($ bil)

2015 44 17.38 39 5.31 2016 70 56.80 72 13.49 2017 24 8.54 52 34.74 2018 28 13.16 12 3.89 2019 42 25.77 15 8.07 2020* 41 53.72 44 34.85 * Through end of September

Largest Bankruptcies 2019/2020

Producers: Debt ($ bil) Chesapeake Energy 9.2 EP Energy 7.3 Ultra Petroleum 5.6 Unit Corporation 4.8

Legacy Reserve 2.6 Approach Resources 3.7 Whiting Petroleum 3.6 Sanchez Energy 2.3

Services:

Diamond Offshore 11.8 McDermott Intl’l 9.9 Weatherford 7.4

Haynes and Boone, Oil Patch Bankruptcy Monitor

Oil Becomes a Dividend-Paying Value Stock? Leaves Its Growth Stock Roots Behind?

• Fracking is highly sensitive to current oil prices: About 40 percent of

recoveries or half of net present value from a newly-fracked well come in the first year. Hedging is essential

• The pressure from Wall Street means oil producers must learn to

themselves as a low P/E, dividend-producing value stock. In the past, they have been rapidly-growing growth stock that reinvested all profits

• $60 oil? About 20% goes to royalties and production taxes, $15 to

production costs, and 30% for dividends and debt reduction. That leaves $23 for reserve replacement, capital expansion, and

• contingencies. At $40? The bottom line falls to $7

Lower Oil Prices, a Credit Squeeze and then COVID-19 Take a Toll On U.S. Oil Production

(million barrels/day, s.a.)

4 5 6 7 8 9 10 11 12 13 14

DOE/EIA, Seasonally adjusted by IRF Production plummeted as oil demand shrank and emergency cuts were made

8 8.5 9 9.5 10 10.5 11 11.5 12 12.5 13

But U.S. oil production slows in mid-2019 then collapses in April/May

COVID Still Has the Reins: U.S. Production of Gasoline and Jet Fuel Reflect Partial Recovery With Little Progress in Sept/Oct

500 1000 1500 2000 2500 500 700 900 1100 1300 1500 1700 1900 2100

‘000 Barrels per Day gasoline jet fuel

Jet Fuel Down 37.6% - > < - Gasoline Down 25.8%

Assume COVID Ends By Early 2021 Leaving Behind a Moderate Recession and Weak Oil & Gas Prices

WTI Spot Oil Spot Natural Gas ($/b) ($.Mcf)

2019Q1 $55.49 $2.95 2019Q2 $59.58 $2.66 2019Q3 $56.22 $2.38 2019Q4 $56.66 $2.29 2020Q1 $45.33 $1.89 2020Q2 $27.53 $1.17 2020Q3 $37.84 $1.65 2020Q4 $39.50 $2.46 2021Q1 $42.07 $3.05 2021Q2 $45.00 $2.99 2021Q3 $46.99 $3.12 2021Q4 $48.52 $3.23 2022Q1 $50.00 $3.00 2022Q2 $55.00 $3.00 2022Q3 $60.00 $3.00 2022Q4 $60.00 $3.00 20 25 30 35 40 45 50 55 60 65 70

Oil Rises to $65/b in 2023Q1

DOE/EIA, Short-Term Energy Outlook to 2021Q4, IRF in forecast in 2022 and later

Post-Trauma Pick-Up in the Oil Fields as Oil Prices Near $40/Barrel and the Rig Count Slowly Moves Up

Weekly Change in the U.S. Rig Count

(80) (70) (60) (50) (40) (30) (20) (10) 10 20

Number of Rigs

Oil Price Stabilize Near $40/b in July

• 60.00
• 40.00
• 20.00

0.00 20.00 40.00 60.00 80.00

NYMEX Spot Oil Price ($/b)

FRED, St. Louis Federal Reserve Bank; Baker Hughes and IRF calculations

The Rig Count Fell by 336 Rigs After November 2018, Then COVID and the Oil War Pile On More Losses

500 1000 1500 2000 2500

The Rig Count’s Wild Ride Since 2014, Number of Working Rigs, seas adj.

200 400 600 800 1000 1200

Recent Losses in Rig Count, Number of Working Rigs, seas. adj.

Baker Hughes Rig Count

Fracturing and Completion Is the Quickest Way to Replace Reserves and Earn Cash

• To the right, you see the number of

fracking fleets at work to fracture and complete wells that have already been drilled

• The first meaningful signs of oil-field

recovery were in early June as the number of fracking fleets rose from 45 to 130 by mid-October

• Drilling is a separate process from

fracking and completion and incurs costs that are similar to drilling

• Sunk cost of drilling makes this the

quickest and least costly avenue for producers to replace reserves and earn cash

100 200 300 400 500 600

Working U.S. Frack Fleets

Primary Vision data through October 14, 2020

Drilled But Uncompleted Well Inventory Still High, But Now Leading the Early Recovery in the Oil Fields

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Number of Drilled but Uncompleted Wells By Region In October

• 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

• 1,000

2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 May-19 Oct-19 Mar-20 Aug-20

Number of Drilled but Uncompleted Wells By Region Still Little Changed All Basins Permian Basin

 All Basins Permian Basin 

DOE/EIA, Drilling Productivity Report, Oct 13, 2020

Houston’s Lost 28,200 Oil & Gas Jobs Since Peaking in April 2019, With 30 Percent of Losses Coming Pre-COVID

• 23
• 18
• 13
• 8
• 3

2

Mining Producers Services Fab Metal Machinery Upstream

Oil & Gas Losses By Sector (000)

After COVID Before COVID

150 155 160 165 170 175 180 185 190

Upstream Oil Jobs (000)

Texas Workforce Commission, calculations of IRF

Initial Claims in Houston’s Oil and Gas Sector Behaved Like Total Claims, But with Elevated Numbers Claims Relative Size

10 20 30 40 50 60 70 80 1 2 3 4 5 6 7 8 9

Thousands Thousands

Houston O&G Initial Claims Are Back Near Pre-COVID Levels

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 3/7 4/7 5/7 6/7 7/7 8/7 9/7

But Oil and Gas Is Still an Elevated Share

• f Total Unemployment Claims (%)

O&G Claims Share O&G Payroll Share Oil and Gas Makes Up 7.6% of Total Payrolls

Texas Workforce Commission, data is for both upstream and downstream oil in the Houston metro area plus two small adjacent counties Oil-Related Claims Total Claims

The Global Economy? It Is Mostly About COVID, Too

IMF Says World Growth to fall 4.4% in 2020 And Recovery of 5.2% Comes in 2021

Percent GDP Growth, Year-Over-Year 2017 2018 2019 2020 2021 World 3.8 3.5 2.8

• 4.4

5.2 Advanced Economies 2.4 2.2 1.7

• 5.8

3.9 U.S. 2.3 2.9 2.2

• 4.3

3.1 Euro Area 2.4 1.8 1.3

• 8.3

5.2 Germany 2.5 1.3 0.6

• 6.0

4.2 France 2.2 1.8 1.5

• 9.8

6.0 Italy 1.7 0.8 0.3

• 10.6

5.2 United Kingdom 1.7 1.3 1.5

• 9.8

5.9 Japan 1.9 0.3 0.7

• 5.3

2.3 Emerging/Developing 4.8 4.5 3.7

• 3.3

6.0 Brazil 1.1 1.3 1.1

• 5.8

2.8 Russia 1.6 2.3 1.3

• 4.1

2.8 India 7.2 6.8 4.2

• 10.3

8.8 China 6.8 6.6 6.1 1.9 8.2

IMF, World Economic Outlook, update as of October 2020

The Global Economy: COVID-19 Dominates the Outlook

• The U.S. joined the global economy in a deep second quarter recession and

partial recovery. Country-to-country differences in economic performance around the world mostly reflect COVID and the timing and duration of lockdowns.

• The IMF forecasts a global growth rate of -4.4 percent in 2020 and 5.2 percent in

2021

• On the IMF’s list of major economies shown above, China is alone a positive growth rate in

2020 at 1.9 percent, followed by 8.2 percent next year

• As bad as it is, the – 4.2% decline for U.S. is among the best among large developed
• countries. The projected 3.1 percent recovery is subdued, however.
• If China is excluded from the list of emerging and developing countries, they have a combined
• 5.7 percent fall in 2020 and a 5.0 percent gain next year
• The global fiscal response has been $12 trillion dollars, with deep rate cuts and

massive liquidity injections and asset purchases

• The IMF sees economic recovery as having already taken root in 2020Q3, and

social distancing and lockdowns slowly end as a vaccine arrives in 2021

Outlook for Houston

COVID and Moderate Recession End in 2021 -- and Oil Prices Drive Differences in the Low, Medium and High Forecasts

20 30 40 50 60 70 80 90 Low Medium High

Real WTI Oil Price

• After the big swings in U.S. and Houston

employment in 2020 driven by COVID and public health orders, the U.S. economy emerges from moderate recession in 2021 and returns to growth.

• The primary differences in our high, medium, and

low forecast are driven by oil prices. Our medium forecast is based on Energy Information Administration’s July forecast

• The high projection accelerates the EIA forecast

and has oil prices rise as high as $80 per barrels and stay there to 2026. Perhaps driven by the loss

• f a major oil field to fire or attack or the

emergence of oil shortages

• The low projects of a long period of $40 per barrel

as weak global growth in oil demand depresses price

Recovery in the Rig Count By Late 2022, But the Exact Timing and Path of Recovery Is Uncertain

200 400 600 800 1000 1200

Baker Hughes Rig Count

Shock + Price Decline Oil Price Decline Only

• The second quarter shock to the rig count

from COVID and the oil war pushed it down to 258 rigs in 2020Q3 (Blue Line)

• Price collapsed, but price fundamentals

alone only would have pushed the rigs count down to 719 in 2020Q2, then to fewer than 600 rigs in Q3 and Q4 (Red Line). The difference (Blue to Red) is the COVID shock

• At some point, price fundamentals

reassert themselves and we return to the Red Line. Where? When?

• Post-COVID recoveries in oil price and U.S.

growth push the rig count back to 2019 levels by late 2022

An Optimistic Return of the Rig Count and Recovery of Oil-Related Jobs in Houston By 2026

400 600 800 1000 1200 1400 1600 1800 2000

U.S. Rig Count 2014 to 2026

220 230 240 250 260 270 280 290 300 310

Houston Oil Jobs 2014 to 2026

The broken line indicates we have lost track of price and other fundamentals in this period due to COVID-19 and worldwide stay-home orders. By early 2021, fundamentals return to oil markets.

A Similar Recovery of Payroll Employment By 2022, With the Exact Timing and Path to Recovery Is Unknown

2800 2900 3000 3100 3200 3300 3400 3500 3600

Houston Payroll employment (000)

Shock + Recession + Oil Price Decline Moderate Recession + Oil Price Decline Only

• The second quarter shock to Houston’s

payroll employment from COVID and the

• il war pushed it down by 273,800 jobs in

2020Q2 and it was still down 187,200 jobs in Q3 (Blue Line)

• Employment collapsed, but a moderate

U.S. recession and oil fundamentals alone would account for only 12,400 lost jobs 2020Q2 and another 23,100 in Q3. The difference – again -- is the COVID shock

• At some point, business cycle

fundamentals (including oil, the U.S. economy, and the retreat of COVID) reassert themselves and we return to the Red Line. Where? When?

Making Up the Story About Getting from Here to There

• Assume the social distancing disappears by 2021Q3 with the arrival of a vaccine
• Houston is left at the trough of a moderate recession that is the COVID and oil

war hangover

• We cannot know what path takes us back from 2020Q4 (now) to 2021Q2

(recession only). I would have to forecast the virus and public health response!

• I just need to fill that gap with about 187,200 jobs left from the COVID shock. See
• below. It is a hypothetical example with three example outcomes. Not a forecast!

Thousand Jobs Best Medium Worst 2020Q2

• 273.8
• 273.8
• 273.8

2020Q3 86.6 86.6 86.6 2020Q4 62.4 37.4 12.5 2021Q1 62.4 46.8 31.2 2021Q2 62.4 103.0 143.6

This Is How The End Game for COVID-19 Might Look As Houston Moves Forward

• 350
• 300
• 250
• 200
• 150
• 100
• 50

50 100 150 200

Quarterly Change in Jobs (000)

Recession Only Rec + High Soc D Rec + Medium Soc D Rec + Low Soc D

2800 2850 2900 2950 3000 3050 3100 3150 3200 3250

Total Employment (000)

Recession Only Rec + Soc D Low Rec + Soc D Med Rec + Soc D High

Houston Payroll Employment to 2026 Including the Last of Social Distancing

2800 2900 3000 3100 3200 3300 3400 3500 3600 3700

Houston Payroll Employment to 2026 Low Medium High

Contributions to Houston Job Growth 2020 to 2026: Payroll Employment (‘000 Q4/Q4)

Change in Payrolls Business Cycle Change Social Distancing Payroll Growth Rate Low Medium High Low Medium High Low Medium High Low Medium High 2019

51.7 51.7 51.7 51.7 51.7 51.7 1.7% 1.7% 1.7%

2020 -230.9

• 205.5
• 180.6
• 56.2
• 55.7
• 55.7
• 174.8
• 149.8
• 124.8
• 7.3%
• 6.5%
• 5.7%

2021

199.0 183.1 169.4 24.3 33.3 44.6 174.8 149.8 124.8 6.8% 6.2% 5.7%

2022

73.9 103.0 114.2 73.9 103.0 114.2 2.4% 3.3% 3.6%

2023

50.4 87.9 104.1 50.4 87.9 104.1 1.6% 2.7% 3.2%

2024

44.4 75.7 91.5 44.4 75.7 91.5 1.5% 2.6% 3.1%

2025

44.5 71.3 86.6 44.5 71.3 86.6 1.3% 2.1% 2.5%

2026

46.2 72.0 87.0 46.2 72.0 87.0 1.4% 2.1% 2.4%

Contributions to Houston Job Growth 2020 to 2026: Payroll Employment (‘000 Year/Year)

Change in Payrolls Business Cycle Change Social Distancing Payroll Growth Rate Low Medium High Low Medium High Low Medium High Low Medium High 2019

66.6 66.6 66.6 66.6 66.6 66.6 2.2% 2.2% 2.2%

2020 -165.2

• 158.8
• 152.6
• 6.3
• 6.1
• 6.1
• 159.0
• 152.7
• 146.5
• 5.2%
• 5.0%
• 4.8%

2021

93.6 104.2 113.4

• 29.5
• 22.8
• 17.4

123.1 127.0 130.9 3.1% 3.5% 3.8%

2022

109.5 117.3 119.7 73.6 91.5 104.1 35.9 25.7 15.6 3.6% 3.8% 3.8%

2023

56.0 93.3 108.1 56.0 93.3 108.1 1.8% 2.9% 3.3%

2024

46.1 93.3 108.1 46.1 80.3 96.1 1.4% 2.4% 2.9%

2025

44.1 80.3 96.1 44.1 72.2 87.8 1.3% 2.1% 2.6%

2026

45.6 72.2 87.8 45.6 71.6 86.8 1.4% 2.1% 2.5%

Houston and COVID-19: Are We Nearing the End-Game?

Robert W. Gilmer, Ph.D. C.T. Bauer College of Business October 2020